Sterling pauses after jump past $1.70

LONDON: Britain's pound struggled to build on two days of gains on Monday, having topped $1.70 for the first time since August 2009 in early trade, in a market in part waiting for a Federal Reserve meeting later this week.

A blip higher for the euro against the dollar kept sterling roughly steady and within sight of a five-year high of $1.7011 reached at the start of European trading.

But against the euro, it was a touch weaker at 79.85 pence after hitting its strongest in 20 months at 79.59 pence.

Dealers and analysts said the week's key event for the pound was likely to be the minutes from the Bank of England's June policy meeting on Wednesday after what was read as a surprise hawkish U-turn on policy by Governor Mark Carney last Thursday.

The pound has gained more than 1 percent since then.

"Today was a little bit of a pause for reflection for sterling," said Paul Robson, currency strategist at RBS Global Banking.

"It's all the events ahead that are more important - the Bank of England minutes will be a clear focus as people wonder whether the dovish consensus on the MPC (Monetary Policy Committee) is gradually shifting."

A rapidly improving UK economy has made sterling one of the past year's biggest winners on major currency markets but until Carney's comments on Thursday - seen as a reversal of his previous dovish stance - doubts had been creeping in.

An interview given on Sunday by Carney's deputy Charlie Bean added fuel to market speculation that the balance of opinion on the bank's policy committee may be fast changing in favour of raising the premium for holding sterling.

Bean said he was optimistic about growth and would welcome the bank's starting to "normalise" interest rates. Many analysts now expect the minutes on Wednesday to show at least one member backing an immediate hike.

"All of these remarks do suggest the tide is turning at the Bank of England," said Jane Foley, a currency strategist with Rabobank in London. "Whether that means that a hike by the end of this year is on the cards, we are not sure. But these minutes may go some way to showing us."

The U.S. Federal Reserve meeting ending on Wednesday also may hint at when it will start to raise rates after the projected end to its monthly quantitative easing programme in September or October.

POLICY MIX

Many economists say privately that the BoE will be reluctant to raise rates close to parliamentary elections next May, which look set to be as tightly fought as 2010 polls that generated Britain's first hung parliament in decades.

With finance minister George Osborne's Conservatives promising more spending cuts and facing threats from populist anti-EU party UKIP and the main centre-left Labour opposition, the outcome of the election may prove important for the BoE's assessment of fiscal policy prospects.

But a number of economists also argue the shift in the bank's tone may be in part due to concerns over the housing sector and potential impact on thousands of heavily borrowed households, for which higher rates might be crippling.

"This ... is more about when the bank starts its journey rather than its intended destination," Credit Suisse analysts said in a note on Monday. "We expect a slow and limited tightening cycle. And one in which tighter macroprudential and monetary policy moves complement each other."

Economists at the world's second-biggest currency trader, Deutsche Bank, on Friday brought forward its prediction for a first rise in BoE rates by six months, to November from May. Credit Suisse followed suit on Monday.

A number of analysts also speculate that Carney may have changed message so quickly in order to ensure he was not left behind by the consensus on the council.

"Strength could continue heading into Wednesday's minutes," Citi analysts said in a morning note. "Indications a more hawkish contingent are growing closer to, or in fact voted for, hikes in June are likely to spur on the recent rally."